When does ‘It Will Hurt the Poor’ outweigh ‘It’s Good for the Environment?’

Nearly every environmental policy hurts the poor the most,” say Iain Murray and David Bier of the Competitive Enterprise Institute. Writing recently in the Washington Examiner, they don’t limit their criticism to absurdities like federal tax credits for the $100,000 plug-in Fisker Karma (“a bold expression of uncompromised responsible luxury.”) The two analysts have it in for any environmental policy that would raise the price of anything—cap-and-trade programs for carbon emissions, clean energy mandates, light bulb regulations, the works.

To be sure, some of the policies they list have their flaws, as I would be the first to concede. What I would like to focus on here, though, is when “it will hurt the poor the most” is an independently valid objection to otherwise sound, market-based environmental policies. I am inclined to say that it never is. Here is why:

“It will hurt the poor” is usually a smokescreen for some other interest.

The first problem with “it will hurt the poor” is that we rarely hear it from the poor themselves or their sincere advocates. Instead, objections to raising prices as a tool of environmental policy come mainly from others.

On the right, the argument is a favorite of the affordable energy lobby. It was recently on display, for example, in a post by the American Coalition for Clean Coal Energy (ACCCE) on the blog Behind the Plug. The post laments that rising energy costs, caused in part by environmental regulations, are disproportionately hurting low-income families.

The ACCCE’s real worry, of course, is the profitability of the carbon-intensive coal industry. Another ACCCE post is blunt about it : “Any legislation or regulation at the federal or state level must, first, do no harm to one of our most abundant and affordable sources of energy.” That’s “first” as in “looking out for number one.” Other purported objectives—jobs, energy security, helping the poor—are mere supporting actors in the old play “King Coal.” (I could go on all day about why we can’t afford “affordable energy.” For more, see here.)

There are voices on the left, too, that disingenuously invoke the poor in opposition to market-based environmental policy. As Gernot Wager details in his book But Will the Planet Notice? liberal environmentalists often look first to life-style changes to save the planet. Motivated by the best of intentions, many middle class greens make big personal investments in reducing their environmental footprints. They buy solar panels for the roof, an electric car for the garage, and drip irrigation for the garden. Having done so, they often react with hostility to economists who favor raising prices as a more effective route to a cleaner environment. “What? We’ve already cut back on our electricity, our gasoline, our water,” they say. “Now, after we’ve bought all these gadgets, you want us to pay a second time by raising the price on the little bit we still use? No way!”

Holding Energy Prices Low is an Inefficient Way to Help the Poor

The idea that environmental policies can adversely impact the poor is not altogether false, of course. If you are trying to get by on a thin budget, an increase in the price of anything is going to be a hardship. That is especially true when the price increase hits something that low-income families use a lot of.

For example, a study commissioned by the ACCCE maintains that the 50 percent of families with incomes less than $50,000 per year spend 19.9 percent of after-tax income on household energy and transportation fuel, compared to just 8.3 percent for those with incomes over $50,000. For families in the income range from $10,000 to $30,000 (many, if not most, of whom would fall under the Census Bureau’s official definition of poverty), the ACCCE estimates energy expenditures at 22.7 percent of after-tax income. In that sense we can say that yes, high energy prices hurt the poor proportionately more than the rich.

However, keep in mind that the low-income half of all families receive only about 20 percent of all income, and that those in the $10,000-$30,000 range receive no more than 10 percent of all income. (These are back-of-the-envelope calculation based on CBO data that do not exactly match the ACCCE tables in terms of dates or definition of income, so allow a margin of error of plus or minus a couple of percentage points.) If that is the case, then the low-income half of all families use only something like 37 percent of all household and transportation energy, and families in actual poverty probably use less than 15 percent.

What that means is that most of the benefits of any policy that keeps energy prices low go to middle and upper-income families. For each dollar of benefits that the lower-income half of the population gets from low energy prices, nearly two dollars in benefits go to the upper-income half. For truly poor families, the ratio is more like 7 to 1. That is true whether low prices are the result of policies that directly subsidize energy prices; policies that increase supply by permissive regulation of drilling, mining, and pipeline construction; or policies that help energy users by allowing them to shift pollution costs to unwilling third parties.

Condoning Irresponsible Behavior is not the Way to Help the Poor

The use of energy, especially fossil energy, has costs that extend beyond those of extraction and distribution to end users. Those external costs include conventional local pollution in the form of smog, sulfur dioxide, and mercury; contributions to global climate change from greenhouse gas emissions; and national security costs associated with defending foreign sources of supply and the economic impact of periodic security-related price spikes. I like to call this inconvenient truth the TANSTAAFL principle: There Ain’t No Such Thing as a Free Lunch.

Violating the TANSTAAFL principle is socially irresponsible. It amounts to making someone else pay for your lunch. Sure, if we wanted to, we could help the poor by condoning all kinds of irresponsible behavior. For example, we could decline to prosecute low-income diners who walk out of the neighborhood McDonald’s without paying for their hamburgers. We don’t do that, though. Instead, we give them food stamps and expect them to buy their lunch at the same prices as their middle-class neighbors.

If we expect the poor to pay for their food, even if we provide some kind of income support to help them to do so, why treat energy differently? The proper policy approach is clear: First set energy prices as a realistic level that reflects all costs, including pollution, climate change, and national security, as well as drilling and delivery. Then, if we are unhappy about the resulting distribution of income, fix that problem by adjusting taxes and transfers.

Policy analysts who are serious about helping both the poor and the environment understand this perfectly well. For example, Chad Stone and Hannah Shaw of the Center for Budget and Policy Priorities explain that a balanced policy to combat climate change

should provide benefits to consumers to offset higher costs while still ensuring that consumers face the right price incentives in the marketplace and reduce fossil-fuel energy consumption accordingly. A consumer relief policy that suppresses price increases in one sector, such as electricity, would be inefficient, because it would blunt incentives to reduce fossil fuel use in that sector.

Stone and Shaw endorse policies such as cap-and-trade that would combat climate change and other externalities through higher energy prices. At the same time, they propose that the impact of those policies on low-income families be offset by payments made through state Electronic Benefit Transfer systems, which are already used to provide food stamps, Temporary Assistance to Needy Families, and other forms of assistance to low-income families. The payments, however, would compensate families only for the average impact of any increase in energy prices. Families that responded to incentives by reducing energy use to a level below the average would have more funds available for other purposes. Those who did not change their energy habits would have less to spend elsewhere.

The use of market mechanisms to pursue environmental goals, while offsetting undue burdens on the poor, is not confined to energy policy. In his book The End of Abundance, David Zetland applies the same approach to water conservation. Zetland is a strong supporter of prices for household water use that reflect the scarcity value of water, not just the costs of treating it and distributing it to users. In many communities, scarcity pricing would mean a sharp increase in water rates from their present levels. To avoid undue burdens on the poor, Zetland proposed a “some for free” approach in which a reasonable minimum of water would be provided to each household at no charge, or at a price well below its full scarcity price. Water use in excess of the minimum would be subject to increasing block pricing. The last units used would carry a price high enough to balance demand against the available supply, avoiding the problems of shortages and emergency rationing that affect many regions of the country today.

Notice, by the way, that policies like those proposed by Stone and Shaw and by Zetland need not be budget-busters. Combating climate change through auctioned permits within a cap-and-trade system or through a carbon tax would generate revenue that could be used, in part, to offset the distributional impacts of the policy. The same is true of increasing block pricing for water: The high scarcity price paid by larger-volume users generates revenues that pay for the “some for free” approach, while still covering the full operating costs of public or private water utilities.

The bottom line: “It will hurt the poor” does not ever have to override “It’s good for the environment.” In any democratic political system, there are going to be differences of opinion on the relative priorities of distributional equity and environmental protection, but to say we must take an either-or approach is simply false. It is perfectly possible to protect the environment and protect low-income consumers from any undue effects of doing so. Anyone who tells you differently is likely to have some agenda that centers neither on helping the poor nor on protecting the planet.